Fiscal Governance and Budgetary Surveillance Reform in the EU€¦ · DG ECFIN 1 Fiscal governance...
Transcript of Fiscal Governance and Budgetary Surveillance Reform in the EU€¦ · DG ECFIN 1 Fiscal governance...
DG ECFIN
1
Fiscal governance and budgetary surveillance reform
in the EU
Anna IaraEuropean Commission
ECFIN.C.4 Fiscal governance and fiscal statistics
wiiw, 29 November 2010
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�EU economic governance reform proposal
�Proposal for a Council directive on requirements for domestic budgetary frameworks
�The impact of rules-based national fiscal governance on sovereign bond spreads
Outline
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3Economic governance reform
Legislative proposals: overview
Budgetary surveillance� Amendments to reg. 1466/97� Amendments to reg. 1467/97� New directive on domestic
budgetary frameworks
Macroeconomic surveillanceNew regulation on preventionand correction of macroeco-nomic imbalances
EnforcementNew regulation on effectiveenforcement of budgetarysurveillance
EnforcementNew regulation on effectiveenforcement of macroeco-nomic surveillance
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4Economic governance reform
Legislative proposals: budgetary surveillance
Amendments to reg. 1466/97 − EDP preventive arm� to date: medium-term objective � new: expenditure growth/prudent fiscal policy making
Amendments to reg. 1467/97 − EDP corrective arm� to date: deficit criterion� new: operationalising the debt criterion
Requirements on domestic budgetary frameworks� new: strengthen fiscal governance at member states’ level
Enforcement�new: earlier sanctions, reverse voting
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5Economic governance reform
Legislative proposals: macroeconomic surveillance
Macroeconomic imbalances� to date: Broad Economic Policy Guidelines: � new: focus on imbalances, formalise evaluation� preventive and corrective dimension
Enforcement (euro area)� fine (0.1% GDP) on repeated insufficient corrective
action/plan; reverse voting
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� Variation in fiscal governance quality across EU members
� Fiscal frameworks effective in supporting sound fiscalpolicies
� EU budgetary framework insufficiently entrenchedin national fiscal governance– enforcement cannot derive only from EU level provisions– EMU needs consistency of domestic and EU budgetary
frameworks
6Economic governance reform
Domestic budgetary frameworks: point of departure
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7Economic governance reform
Domestic budgetary frameworks: where do member states stand?
CY EL
MT
UK
PT
IE
AT
RO
LV
IT
SK
FI HU
SI
CZBE
FR
DE
PL
LU
SEDK
EE
NL ES
LT
BG
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
Fiscal rule index (standardised), 2009
MT
BF
in
dex
(st
and
ard
ised
), 2
009
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8Reform proposals
Domestic budgetary frameworks: why useful?
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Ave
rage
prim
ary
cycl
ical
ly-a
djus
ted
bala
nce,
as
a pe
rcen
tage
of G
DP
25% lowest values of the fiscal rule
index
Low values of the fiscal rule index (less than median but above
first quartile)
High values of the fiscal rule index (more than median but below fourth
quartile)
25% highest values of the fiscal rule index
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Minimun requirements:
�accounting and statistics�macroeconomic and budgetary forecasts �numerical fiscal rules�medium-term budgetary frameworks� transparency of general government finances;
comprehensive scope of budgetary frameworks
Compliance of member states expected by end-2013
9Reform proposals
Draft Council directive on requirements for the budgetary frameworks of the Member States
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Rules and risk in the euro area:
does rules-based national fiscal governance contain sovereign bond spreads?
(with Guntram B. Wolff)
Rules & risk
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11Rules & risk
Sovereign bond spreads in 10 euro area members
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12Rules & risk
Motivation
�High sovereign spreads - growing public debt
�Fiscal profligacy in good times
�Reform proposals calling to strengthen fiscal governance
�Commitment to consolidate
�Assess impact of fiscal rules on sovereign risk
�Unique and detailed dataset on numerical fiscal rules
Our paper
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Numerical fiscal rules
Permanent constraints on summary indicators of fiscal performance (Kopits and Symansky, 1998)
Why numerical fiscal rules?
Deficit bias…
… common pool problem of governments withoutcentralised spending powers
... time inconsistent preferences
… supranational externality
13Rules & risk
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�USA: von Hagen (1991); Bayoumi and Eichengreen (1994); Alesina and Bayoumi (1996); Bohn and Inman (1996)
�Creative accounting: von Hagen and Wolff (2006); Buti et al. (2007)
�Enforce compliance: Inman (1996); Ayuso-i-Casals et al. (2009)
�Commitment device: Debrun and Kumar (2007); Debrun (2007); Debrun et al. (2008)
�Forms of fiscal governance: von Hagen, 2010
14Rules & risk
Literature: fiscal rules
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�Common risk factor: Favero et al. (1997); Lemmen and Goodhart (1999); Codogno et al. (2003)
�Fiscal fundamentals and transparency: Bernoth et al. (2004); Bernoth and Wolff (2008); Heppke-Falk and Wolff (2008); Schulz and Wolff (2009); Schuknecht et al. (2009)
�Banking and external imbalances: Barrios et al. (2009); Gerlach, Schulz and Wolff (2010), Ejsing and Lemke (2010)
�Fiscal institutions: Poterba and Rueben (1999);Hallerberg and Wolff (2008)
15Rules & risk
Literature: determinants of sovereign spreads
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Risk neutrality – no-arbitrage condition:1 + r* = (1 – θ i, t+1)(1 + ri,t) => ri,t – r*
t = θ i, t+1with r* return to risk-free asset
ri,t return of bond issued by country iθi,t default probability of country i
Allow for risk aversion: 1 + r* = α (1 – θ i, t+1)(1 + ri,t) with α ≥ 1
=> ri,t – r*t = α t θ t
Determinants of sovereign default: θi,t = ξ (Et (Xi,t+1), Et(Bi,t+1), Et(si, t+1), ci)
Thus: ri,t – r*t = f (αt, Et(Xi,t+1), Bi,t, si,t, Et(si,t+1), ci)
16Rules & risk
Our approach
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17Rules & risk
Our approach
Where do we stand?Risk neutrality – no-arbitrage condition:
1 + r* = (1 – θ i, t+1)(1 + ri,t) => ri,t – r*t = θ i, t+1
with r* return to risk-free assetri,t return of bond issued by country iθi,t default probability of country i
Allow for risk aversion: 1 + r* = α (1 – θ i, t+1)(1 + ri,t) with α ≥ 1
=> ri,t – r*t = α t θ t
Determinants of sovereign default: θi,t = ξ (Et (Xi,t+1), Et(Bi,t+1), Et(si, t+1), ci)
Thus: ri,t – r*t = f (αt, Et(Xi,t+1), Bi,t, si,t, Et(si,t+1), ci)
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18Rules & risk
Aggregate risk: spread between low grade US corporate and government bonds
0
50
100
150
200
250
300
350
400
450
500
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Basis points
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19DG Ecfin database on fiscal governance
Where do we stand?
Ru
le n
o.
Co
un
try
Typ
e
Sec
tor
Tar
get
/co
nst
rain
t
Des
crip
tio
n
Acc
ou
nti
ng
sys
tem
Tim
e fr
ame
(yea
rs)
Sta
tuto
ry b
ase
Mo
nit
ori
ng
bo
dy
En
forc
emen
t b
od
y
No
n-c
om
plia
nce
act
ion
s
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1011 AT BBR CG, RG, LG
Budget balance as % of GDP
Deficit targets for the CG, RG (Länder), and LG contained in a National Stability Pact within a multiannual budgetary setting.
ESA 2 . . . .
1012 AT BBR CG, RG, LG
Budget balance as % of GDP
Deficit targets for the CG, RG (Länder), and LG contained in a National Stability Pact within a multiannual budgetary setting.
ESA 4 . . . .
1013 AT BBR CG, RG, LG
Budget balance as % of GDP
Deficit targets for the CG, RG (Länder), and LG contained in a National Stability Pact within a multiannual budgetary setting.
ESA 4 L GS GS Possibility of sanctions
2011 BE ER CG Real expenditure growth rate
Real growth of primary expenditure for CG ought to be equal or lower than 0%.
BA 4 CA IND, NP GS No pre-defined action
2021 BE RR CG Growth of revenues in relation to GDP growth
Growth of fiscal revenues has to be in line with GDP growth (both in nominal terms).
BA 4 CA No body MF, GS No pre-defined action
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� Dimensions– legal base– room for setting/revising objectives– nature of monitoring/enforcement body – enforcement mechanisms– media visibility
� Aggregation using random weights
� Decreasing benefit from multiple rules
� Adjusted to coverage of general government finance
20Rules & risk
The fiscal rule index
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21Rules & risk
The fiscal rule index in 11 euro area members
0
1
2
3
4
5
6
7
8
9
10
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year
Fiscal rule index
AT
BE
DE
EL
ES
FI
FR
IE
IT
NL
PT
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Estimating equationri,t = β1 risk t + β2 bas i,t + β3 risk t bas i,t +
+ β4 fgdp i,t + β5 risk t fgdp i,t + + β6 debt i,t + β7 risk t debt i,t + + β8 bali,t + β9 risk t bal i,t + + β10 fri i,t + β11riskt frii,t + ci + ui,t
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Empirical approach
Issues� control for liquidity risk� endogeneity� annual data� separated impact of fri dimensions
DataBloomberg, EuroMTS, Ameco
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23Rules & risk
Estimation resultsuscorp 0.19 *** 0.14 *** 0.08 *** 0.08 *** 0.07 0.08 *** 0.06 ** 0.07 *** 0.05 **
(0.02) (0.02) (0.02) (0.01) (0.04) (0.02) (0.02) (0.02) (0.02)
FRI 4.37 *** 3.90 *** -0.88 5.58 -1.14 -10.22 *** -0.48 -9.32 ***
(1.59) (1.32) (1.48) (3.54) (3.05) (3.19) (2.93) (3.19)
uscorp *FRI -0.02 *** -0.02 *** -0.01 ** -0.02 ** -0.02 *** -0.004 -0.02 *** -0.01(0.00) (0.00) (0.00) (0.01) (0.00) (0.005) 0.00 0.01
balance -4.04 *** 0.69 -5.27 *** -4.29 *** -0.93 -3.64 *** -1.35(0.61) (1.22) (1.61) (1.03) (1.62) (1.02) (1.62)
debt 0.81 *** 0.75 *** 0.57 *** 1.57 *** 1.63 *** 1.03 ** 1.40 *** 0.97 **
(0.22) (0.18) (0.18) (0.47) (0.45) (0.40) (0.44) (0.39)
uscorp *balance -0.02 *** -0.02 *** -0.01 **
(0.00) (0.01) (0.01)
uscorp *debt 0.001 0.002 ** 0.002 **
(0.001) (0.001) (0.001)
bid-ask spread -13.50 14.15 -357.18 ** -193.61(42.29) (38.20) (148.26) (134.16)
uscorp *bid-ask spread 0.882 ** 0.542(0.366) (0.336)
N 107 107 107 107 117 69 69 69 69
r2 0.60 0.73 0.82 0.86 0.42 0.86 0.91 0.87 0.91
Estimation with panel fixed effects. Standard errors in parentheses. Time period: 1999-2009 (107 observations),
1999-2010 (117 observations), 2003-2009 (69 observations).
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24Rules & risk
Marginal effect of fiscal rules on sovereign bond spreads
-15
-10
-5
0
5
1 51 101
151
201
251
301
351
401
451
501
551
601
651
701
751
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25Rules & risk
Whi
ch c
ompo
nent
of
fisc
al r
ules
?
uscorp 0.08 *** 0.06 *** 0.11 *** 0.11 *** 0.13 *** 0.00 -0.040.02 0.02 0.01 0.01 0.01 0.03 0.08
FRI 3.90 ***
1.32
uscorp *FRI -0.02***
0.00
FRI1 3.46 ** -10.08 **
1.40 4.85
uscorp *FRI1 -0.02 *** -0.03 *
0.00 0.02
FRI2 4.06 *** 5.171.23 3.88
uscorp *FRI2 -0.02***
-0.020.00 0.02
FRI3 3.24 *** 3.391.09 4.45
uscorp *FRI3 -0.02 *** 0.030.00 0.02
FRI4 3.41 *** 0.651.24 2.67
uscorp *FRI4 -0.02***
0.010.00 0.01
FRI5 3.96 *** 4.781.32 4.70
uscorp *FRI5 -0.02 *** -0.010.00 0.01
balance -4.04 *** -4.18 *** -4.02 *** -4.09 *** -3.90 *** -4.08 *** -4.29 ***
0.61 0.61 0.61 0.61 0.65 0.61 0.62
debt 0.75***
0.72***
0.73***
0.73***
0.79***
0.84***
0.88***
0.18 0.18 0.18 0.19 0.19 0.18 0.21
N 107 107 107 107 107 107 107
R² 0.82 0.81 0.82 0.82 0.80 0.81 0.84
marginal effect of FRI_i
at uscorp =500 -6.15 -7.12 -4.79 -4.73 -5.72 -5.45 -24.71
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� Quarterly frequency� Measurement of aggregate risk: VIX� Dataset with longer and better bid-ask spread series
(Gerlach et al. (2010))� Sample: year < 2009; exclude IE
26Rules & risk
Robustness checks
DG ECFIN
� National fiscal rules reduce sovereign spreads in timesof higher risk aversion– economically and statistically significant– effect of up to 100-200 bps
� Important characteristics of rules-based frameworks– legal base of rules– stringency of enforcement
� Possible way for high-risk countries to regain marketconfidence
27Rules & risk
Conclusion